k.k final report

1. INTRODUCTION OF INVENTARYAn inventory can be defined as a stock of goods which is held for the purpose of

future production or sales. The stock of goods may be kept in the following forms:

Raw Materials

Partly finished goods

Finished goods.

Spare parts etc.

OR

A stock of items held to meet future demand

Inventory is a list for goods and materials, or those goods and materials

themselves, held available in stock by a business.

Variables in an Inventory Problem:

The variables associated with the inventory problems are classified into two

categories.

The Controlled variables

The uncontrolled variables

The variables that may be controlled, separately or in combination are

following:

The quantity acquired – By purchase, production, or some other means. The

decision maker may have a control over the production or purchase level.

The frequency of timing of acquisition – The decision maker may have control over

how often or when the inventory should be replenished.

The stage of completion of stocked items – The decision maker may have a control

over the stage at which the unfinished items be held so that there is no delay in

supplying customers.

The uncontrolled variables – The variable that may not be controlled in an inventory

problem are divisible into cost variables and others.

Inventory management:

Inventory management is the branch of business management concerned with

planning and controlling inventories.

Inventory is stock of items held to meet future demand.

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It deals with two basic questions:

How much to order

When to order?

Types of Inventory:

Raw Material

Work in progress

Finished Goods

Nature of Inventories

Raw Materials – Basic inputs that are converted into finished product through the

manufacturing process.

Work-in-progress – Semi-manufactured products need some more work before they

become finished goods for sale.

Finished Goods – Completely manufactured products ready for sale.

Supplies – Office and plant cleaning materials not directly enter production but are

necessary for production process and do not involve significant investment.

Reasons To Hold Inventory

Meet variations in customer demand:

Meet unexpected demand

Smooth seasonal or cyclical demand

Pricing related:

Temporary price discounts

Hedge against price increases

Take advantage of quantity discounts

Process & supply surprises

Internal – upsets in parts of or our own processes

External – delays in incoming goods.

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Objective of Inventory Management

To maintain a optimum size of inventory for efficient and smooth production and

sales operations.

To maintain a minimum investment in inventories to maximize the profitability.

Effort should be made to place an order at the right time with right source to

acquire the right quantity at the right price and right quality.

An effective inventory management should:-

Ensure a continuous supply of raw materials to facilitate uninterrupted production.

Maintain sufficient stocks of raw materials in periods of short supply and

anticipate price changes.

Maintain sufficient finished goods inventory for smooth sales operation, and

efficient customer service.

Minimize the carrying cost and time.

Control investment in inventories and keep it at an optimum level.

An optimum inventory level involves three types of costs:-

Ordering costs:-

Quotation or tendering

Requisitioning

Order placing

Transportation

Receiving, inspecting and storing

Quality control

Clerical and staff

Stock-out cost

Loss of sale

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Failure to meet delivery commitments

Carrying costs:-

Warehousing or storage

Handling

Clerical and staff

Insurance

Interest

Deterioration,shrinkage,

Taxes

Cost of capital

Dangers of Over investment:-

Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity

cost

Excessive carrying cost

Risk of liquidity- difficult to convert into cash

Physical deterioration of inventories while in storage due to mishandling and

improper storage facilities

Dangers of under-investment:-

Production hold-ups – loss of labor hours

Failure to meet delivery commitments

Customers may shift to competitors which will amount to a permanent loss to

the firm

May affect the goodwill and image of the firm

Functions of Inventory Management:-

Track inventory

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How much to order

When to order

Basic EOQ Model

Assumption

Seasonal fluctuation in demand are ruled out.

Zero lead time – Time lapsed between purchase order and inventory usage.

Cost of placing an order and receiving are same and independent of the units

ordered.

Annual cost of carrying the inventory is constant.

Total inventory cost = Ordering cost + carrying cost

Inventory management:-

Two system followed

Periodic review

Fix order quantity

In periodic stock position is reviewed periodically rather than continuously. A

new order is always placed at the end of the each review.

In Fixed order quantity system the stock of an item is continuously reviewed. A

reorder level is decided on. Whenever the stock of the item equals the reorder level, a

new order is placed. The time between orders can vary. In this system, the order

quantity ordered is always fixe and is equal to the EOQ. EOQ (Economic Order

Quantity) is calculated by a formula which ensures that the total cost is minimum.

Lead time is the lapsed time between the placement of an order and its actual delivery.

Safety stock level is also known as buffer stock. It is the extra quantity of

merchandise that is stocked to take care of delay in delivery and higher demand

during the lead time.

Lead time is the lapsed time between the placement of an order and its actual

delivery.

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Safety stock level is also known as buffer stock. It is the extra quantity of

merchandise that is stocked to take care of delay in delivery and higher demand

during the lead time.

Types of Inventory

Movement inventory:-This inventory is known as transit or pipeline inventory

arises due to shipment of inventory items to distribution centres and from various

production centers.

Buffer inventory:- This inventory is maintained to meet uncertainties of demand

and supply. Such buffer inventory which are in excess of those necessary to just

meet the average demand during the lead time.

Anticipation inventory:-This is known as seasonal inventories held because of

future demand which is anticipated.

Decoupling inventory:-This is used to reduce interdependence of various stage of

production systems are known as decoupling inventories.

Lot size inventory:-These are held for the reason that purchases are usually made

in lots rather than for the exact amounts which may be needed at appoint of time.

2. INTRODUCTION TO GLAXO SMITH KLINE

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Glaxo Smith Kline Consumer Healthcare Ltd. (GSKCH) is an Indian associate of

Glaxo Smith Kline plc, U.K.

GSKCH is one of the largest players in the Health Food Drinks industry in India.

The Company, with its manufacturing plants located in Nabha, Rajahmundry and

Sonepat, has a total workforce of over 2700 people, each driven by a spirit of enterprise.

Its flagship product, Horlicks, is a highly respected brand, which is over 100 years old in

India. The Company also manufactures and markets Boost, Viva, Maltova, Biscuits and

in addition promotes and distributes a number of products in diverse categories, including

prominent brands such as Eno, Crocin and Iodex.

GSKCH has a strong marketing and distribution network in India comprising over

1800 wholesalers and direct coverage of over 4,00,000 retail outlets.

GlaxoSmithKline's Consumer Healthcare business is based on scientific innovation. The

company has dedicated consumer healthcare R&D centers and takes research as seriously

as marketing excellence, offering cutting-edge capability in both.

HISTORICAL BACKGROUND

Glaxo Smith Kline Consumer Healthcare Ltd. is a pharmaceutical and

healthcare company born out of the merger of two leading international organizations

SmithKline Beecham and GlaxoWellcome. GSK Consumer Healthcare Ltd and GSK

Pharmaceuticals Ltd are the two businesses of GSK in India of which former are

headquartered at DLF Gurgaon and the latter at Worli, Mumbai.

Its global mission is“To improve the quality of human life by enabling people to do

more, feel better and live Longer ".

In the Indian market, GSKCH's journey began with Horlicks.

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Year Description

1955: In the early years, Horlicks, a milk product manufactured by

Horlicks Ltd. Slough, England was being imported, bottled and

sold in India. Due to changes in import policy import stopped.

1956–57: A team from the organization visited to explore the possibilities of

setting up a plant with the support of Maharaja of Nabha, His

highness PRATAP SINGH , and a plant was set up at Nabha.

1958: On May 31, 1958 His highness Pratap Singh laid the foundation

stone of the Company at Nabha and Hindustan Milkfood

Manufacturers Pvt. Ltd., was promoted by Horlicks Ltd.

1960: On 24th March 1960, the factory went into production.

1969 : Horlicks Group disposed off their holding in India and U.K. to "

BEECHAM GROUP OF INDUSTRIES ". Beecham plc acquired

Horlicks Limited and became the majority shareholder in

Hindustan Milkfood Manufacturers Limited. Beecham plc. which

is multinational and owns more than 500 companies in more than

200 countries engaged in manufacturing of Brylcream, Haircream ,

Eno fruit salt , MacLean , Toothpaste , Pure Silvikrin etc.

1979: Beecham India (Pvt.) Ltd. Mumbai merged with Hindustan Milk

food

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Manufacturers Ltd. and the name was changed to H.M.M. Ltd.

Beecham Group Plc.

1989: Beecham plc, UK and SmithKline, USA merged in 1989 to form

Smith Kline Beecham plc, with its registered office in the UK.

HMM Limited thus became part of SmithKline Beecham

Consumer Brands; one of the three sectors of SmithKline Beecham

and its name was changed to SmithKline Beecham Consumer

Brands Limited.

1994: The name was changed to SmithKline Consumer Healthcare Ltd. to

reassert the company's promise of providing Healthcare to consumers. The

company . Decided to do away with its toiletry products and sold its

brands like Brylcream and Silvikrin to Sara Lee.

2000: The Company acquired MALTOVA and VIVA brands of nutritional from

Jagjit Industries Ltd.

A merger took place between SmithKline Beecham and Glaxo Wellcome and the

new company Glaxo SmithKline (GSK) was formed on 27-12-00.

2002: Change of name took place from 23-04-02

2004: The Bank of Punjab has tied up with the company for facilitating

finance on attractive terms to its milk suppliers.

Our new identity, GSKCH, has been created to reflect our shared values towards

scientific research and improving people's lives.

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Glaxo

SmithKline Beecham

Merge GlaxoSmithKline

PLANT LOCATIONS IN INDIA

Production Stations

Food Powder : Nabha, Rajahmundry, Sonepat & Hamira

Biscuits : Sahibabad

Eno : Rajahmundry

Crocin : Banglore

Iodex : Banglore

PACKING STATIONS

The company started packing Horlicks in ½ Kg and 1kg pouches. Packing machines

was imported and installed. As the main market for sale of Horlicks was in the South and

East India, need was felt for the sale of Horlicks in small units of the country. Therefore

was opened at different places. At present Horlicks is dispatched from Nabha in bulk

quantity to the following packing stations:

Mangaldoi (Assam)

Kompally

Baddi (Himachal Pradesh)

PRODUCT PROFILE

In line with the increased buoyancy across the FMCG segment, GSK continues to

perform well with sales growth of 15.3% over 2012.

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1. HORLICKS: -“ THE GREAT FAMILY NOURISHER”

The flagship brand of the company, this product

name is associated with that of the company.

Horlicks, which was restaged the previous year,

following intense market research and product

development activities, with an improved

formulation, which is clinically tested to make

children “Taller, Sharper & Stronger”, continues to

grow strong. India forms almost half the world's

market for Horlicks. Horlicks sales crossing the 1000 crores in 2013.

2. JUNIOR HORLICKS

Chocolate Horlicks and Junior Horlicks were

restaged during the tear keeping in mind the

consumer expectations from the two brands.

Junior Horlicks was launched in 1991 in Karnataka

in an attempt to cater to the specialized needs of

certain age groups. This special nourisher, an

Indian brand was targeted at 1-3 years old as a

delicious tasting Milk food drink based on the

international standards of nutrition

3. BOOST

Boost was launched in 1976 as an energy drink in the

Brown Powder segment. Boost along with Boost

Chocoblast, which was launched in the previous year,

continue to deliver as per expectations. An Indian

Brand, this is manufactured at the Nabha Plant. It is

also exported to , countries in West Asia. Very popular

in the South, Boost has grown an average growth rate of 9% per annum. Sportsmen like

Virender Sehwag and Sachin Tendulkar back it, making it the secret of OUR ENERGY!!

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4. MOTHER HORLICKS

Mother’s Horlicks (launched in November’96), is a special nourisher scientifically

designed to help meet the nutritional needs of pregnant and lactating women, as part of a

healthy diet. It is made with the natural goodness of Horlicks by a unique spray dried

process, which helps make it easy to digest. It is enriched with natural honey, and a

combination of vitamins and minerals that not only gives excellent flavor but also help in

keeping good health during pregnancy and optimal birth weight of the baby It is also

essential for physical and mental development of the growing foetus.

5. BISCUITS

The biscuit division has spread its wings and set flight with a 54% increase in the

turnover. Horlicks biscuits are now a truly national brand. The division has a number of

plans for the future growth with the lot of exciting new variety up its sleeves.

6.ENO

Eno is a 100 years old global brand. It is a part of

‘Gastrointestinal category’ Eno is the only powder antacid

and has shown favorable growth over the years. This has

been strengthened of the lemon variant and the sachet pack.

7. GOPIKA GHEE (BY PRODUCT)The main by-product of this company is Gopika Ghee. Gopika Ghee is packed in the

factory itself, rest of the product are bulk packed in containers, which contain 186 kg of

Horlicks and 124 kg. of Boost. These are sent to 3 packing stations.

GSK MISSION

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Our global quest is to improve the human life by enabling the people

“TO DO MORE, FEEL BETTER, AND LIVE LONGER”.

People at Glaxo Smith Kline Consumer Healthcare limited are dedicated ourselves

to delivering medicines and products that help million of people around the world LIVE

LONGER, HEALTHIER AND HAPPIER LIVES.

CULTURESuccessful companies have developed something special that supersedes corporate

strategy, market presence, or technical advantage- distinctive culture. What it is, whether

it is important or not, what you deal with indirectly. Why? Because culture is an

intangible shadow. Having said all that, it is an important issue GSK’s culture is the set of

norms that create powerful precedents for acceptations around acceptable risk, change

orientation, creative and innovation, group versus individuals effort, customers

orientation, extra efforts and more. Culture is a powerful force and can provide an engine

to achieve market success or an anchor pulling the firm toward failure

FINANCIAL HIGHLIGHTS :The Company has reported 15% sales growth and 28.2% PAT growth for 2013

over the previous year in its Annual Report. The total Reserves as on 31-12-2013 stood at

Rs. 6043 Million representing an increase of 20.7% from last year. The Company has no

Loan outstanding as on December 31, 2012. Following is the Ratio Analysis of its

financial implications:

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TURNOVER (Rs. CRORES)

TURNOVER (Rs. crores)

Years Turnover Growth Rate

2009 909 4

2010 982 8

2011 1089 11

2012 1210 11

2013 1395 15

PROFITS (Rs. Crores)

Profit Before Tax (Rs. crores)

Profit Before Tax % of sales

2009 100 11

2010 116 12

2011 162 15

2012 191 17

2013 245 18

This graphs shows that profit before tax in 2013 is 245 Millions (approx.) 18% of total

sales, which is more all the figures of previous four years. This shows that company has

reduced its expenses to the optimum level as compared to previous years.

This graphs shows that net profit in 2013 is 2451 Millions (approx.) 12% of total sales,

which is more all the figures of previous four years.

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RATIO ANALYSIS Ratio analysis is the powerful tool of financial analysis of accounting data, the

relationship of he figures should be meaningful. In financial analysis. Ratio is used as an

index or yardstick for the performance of the firm. To analysis the working capital

position we here by analysis and interpret the following ratios

Current ratio

Absolute liquid ratio

Quick ratio

Current asset turnover ratio

Equity Ratio

Inventory turnover ratio

Debtors turnover ratio

EPS Ratio

Current Ratio: Current Assets / Current Liabilities

(Rs lakhs)

Year 2013 2012

Current Assets 37193.60 29776.50

Current Liabilities 24947.50 20855.10

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For the year 2013 For the year 2012

37193.60/ 24947.50 29776.50/20855.10

= 1.491 = 1.428

The current Ratio of the company has slightly increased in 2013, reason being the

increase in current Assets like cash & Bank balance, Inventory etc. On the other hand

current liabilities and provisions has also increased that’s why there is only a .07%

increase in current ratio. The current ratio of the company does not meet the rule of

thumb requirement of 2:1.

CURRENT RATIOS: (Rs. CRORES)

Current Ratio

Years Current Assets (in millions)

Current Liabilities

(in millions) RATIO

2009 363.0 177.6 2.04

2010 432.0 178.3 2.42

2011 401.8 182.9 2.20

2012 297.8 208.6 1.43

2013 371.9 249.4 1.49

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Current Ratio in 2013 is 1.49 which is more than the last year’s Current Ratio which is

1.43 and this increase in current ratio is due to increase in current assets is more than

increase in current liabilities.

Liquid Ratio: Quick or liquid Assets / Current Liabilities

Quick or liquid assets include all the current assets except prepaid expenses & Inventory.

(Rs lakhs)

Year

Year

2013 2012

Liquid assets 17711.20 15219.20

Current liabilities 24947.50 20855.10

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17711.20/24947.50 15219.20/20855.10

= .71 = .73

The liquid ratio of the company has declined in 2013; it reaches to .71 from .73 in the

year 2012. This is mainly due to decrease in liquid assets like loans and advances and

increase in current liabilities. It is also short of the rule of thumb liquid ratio i.e. 1:1.

Absolute Liquid Ratio: Absolute liquid Assets / Current Liabilties

Absolute liquid Ratio include cash & bank balances, Marketable Securities

Year 2013 2012

Absolute liquid assets 9366.60 4791.60

Current liabilities 24947.50 20855.10

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(Rs lakhs) the year 2007 For the year 2005

For year 2013 For year 2012

9366.60/ 24947.50 4791.60/ 20855.10

= .375 = .229 The absolute liquid ratio of the company in 2013 has increased as compared to previous

year. The main reason for this is increase in cash and bank balances, but it is still short of

rule of thumb i.e. 0.5:1

Inventory turnover Ratio: NET SALES / INVENTORY

(Rs lakhs)

Year 2013 2012

Net sales 127782.80 110787.10

Inventory 19482.40 14557.30

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127782.80/19482.40 110787.10/14557.30

=6.56 =7.61

Inventory Turnover Ratio is 6.56 in year 2013 as compared to 7.61 in the year 2012. It

shows that company hasn’t been able to convert their stocks into sales as efficiently as

compared to last year.

Inventory conversion period =365 / ITR

2013 2012

365/6.56 365/7.61

=55.64 days =47.96 days

The inventory conversion period of the company in 2013 is 56 days i.e. the company

convert the inventory into sales within 56 days (app) which has increased from the last

year I which it was 48 days. It shows that the company hasn’t been able to clear its stocks

as effectively as it was in the last year.

Debtors Turnover Ratio: Sales/Debtors (Debtors/R)

( Rs lakhs)

Year 2013 2012

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Sales 127782.80 110787.10

Debtors 2736.2 2808.5

For the Year 2013 For the Year 2012

127782.80/2736.2 110787.10/2808.5

=46.70 =39.45

Debtors Turnover Ratio has increased in 2013 as compared to 2012 which is good for the

company and shows the efficiency of the management.

Debtors collection period = 365 / DTR

2013 2012

365/46.70 365/39.45

= 7.82 days =9.25 days

The debtor’s collection period of the company in 2012 is 9 days but in 2013 it is decrease

to 8 days only, it shows that the company is adopting strict debtors’ policy.

Equity Ratio: Shareholders Fund / Total Assets

(Rs lakhs)

Year 2013 2012

Shareholders fund 64635 54271.9

Total assets 66360 56680

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64635/66360 54271.9 / 56680

= 0.97 = 0.96

Equity ratio of the company has slightly increased from 0.96 in 2012 to 0.97 in

2013. It shows that the financial position of the company is very strong because app. 97%

of the assets of the company are being funded by the shareholders of the company.

Earning Per Share: Net profit (after interest & tax) / No. of share holders

(Rs lakhs)

Year 2013 2012

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Net profit 16267.50 12693.40

No. of shareholder 420.55538 420.55538


16267.50/ 420.55538 12693.40/ 420.55538

= Rs. 38.68 = Rs. 30.18

The Earning per Share has increased to Rs. 38.68 in 2013 from Rs. 30.18 in 2012 which

is good for the company and the shareholders.

Return on Shareholders Fund: Net profit (after int. &tax) Shareholders fund

( Rs lakhs)

Year 2013 2012

Net profit 16267.50 12693.40

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Shareholders fund 64635 54271.9


16267.50/ 64635* 100 12693.40/54271.9*100

= 25.17% =23.39%

5. ABOUT THE NABHA PLANT

GSK’s Nabha plant is a huge manufacturing unit. Glaxo SmithKline Consumer

Healthcare Ltd. is having three factories, which are at Nabha, Rajahmundry and Sonepat.

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The factory at Nabha is the mother unit and products manufactured by this company fall

under two categories of consumer healthcare:

The food powder (HORLICKS & BOOST) is manufactured in Nabha. The

requirement of workforce changes with change in production policy. The plant at present

employs a work force varying from 1500 to 2000 out of which approximately 1100 are

permanent. There is a staff and management of about 145 persons. There is a wage

agreement for 3 years. The workers also getting weekly off according to Labors Act.. The

plant runs 365 days a years in 3 shifts daily which work from 5.15 a.m. to 1.15 p.m., 1.15

p.m. to 9.15 p.m. & 9.15 p.m. to 5.15 a.m.. The office opens 6 days a week.

About 7 Milk collection centers were opened at a radius of about 40km around Nabha, to

meet the requirement of 10 tones of Milk per day. The main purpose of opening collection centers

at village level was to get good quality of Milk directly from the producer and pay them good

price, thus, raising their standard of living. Nabha and Sonepat production facility has already

been certified for HACCP ( Hazard Analysis Critical Control Point for Food Safety ).

DEPARTMENTAL OVERVIEW

The various departments in GSK Ltd. Nabha are:

OPERATIONAL

EXCELLENCE

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Nutritional Health Drinks

Gastrointestinal ENO Fruit Salts

Horlicks and its variants

MANUFACTURING

FINANCE DEPARTMENT

Main Functions of Finance Department Are As Follows: -

Vendor paymentWhen an article arrives at the gate, an entry permit is made and they are sent to the

GOODS INWARD DISPATCH section (GID). A goods inward from (gif) is filled up and

sent to the finance department for payment .the vendor submit the bill to purchase

department .the finance department also receives a hard copy of the corresponding

purchase order (PO). There is online passing and payment system. This contains a

database of all purchase order issued. These are checked against the bills for the GIF, PO

references after which the bill is posted for production of the payment slips.

Disbursement of salaries The HR Department sends a compile list of all employees on the payroll together with

their monthly working records .The salaries are paid mainly through the bank to all the

employee.

Payment to government bodies

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QUALITYASSURANCE

PROCUREMENT

ENGINEERING

WAREHOUSESUPPLY CHAINMANAGEMENT

HR & A

FINANCE&

I.T.

ENVIORNMENT HEALTH &SAFETY

Excise is paid to all suppliers for goods manufactured. The company takes credit of the

payment of excise from the govt. According to the CENVAT. Excise is however paid for

the finished goods. Property tax, insurance and sales tax are also paid in case of accidents;

breakdowns are called for assessment, when a claim is filed. VAT is paid to Excise and

Taxation Department of Punjab.

Milk accountingEvery milk supplier has a code, the first two digit indicating whether the milk is from

cow, buffalo and the next three digits indicating the supplier. Payments are made after 10

days by cheque/MT/DD.

Cash/bankingThere are separate accounts for raw material excluding milk, stores, services, capital and

packing material. Every department submits its monthly cash requirement and sends it to

finance where it is consolidated.

Payment of servicesThe finance department pays for various services like rent, truck hire etc.

DEPARTMENTAL CHART OF FINANCE & IT

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MANUFACTURING PROCESS

The Manufacturing process for Horlicks is as Follows:

1. The First step in the production process involves the mixing of wheat flour with

Malted Barley.

2. In The Second step water is added to the above mixture and the material is

mashed thoroughly, as a result of which the outer cover of malted barley is moved

and remains after it is called Husk.

3. After mashing the material it becomes thick slurry in which the solid content is

above 50%.

4. The fourth step involves the adding up of water to the above mixture.

5. The next stage is the stage of evaporation in which the material is evaporated and

the result is thick slurry of the material in which the solid content is around 80%.

6. After evaporated comes the step of spreading out of material in plates and keeping

them in the oven for about half an hour.

7. Once the material is completely dried, the plates are taken out from the oven and

the food item is scrapped out, which comes out in the form of thin layers. Then the

vitamins and other essential nutrients are added to the food items which is then

ground and the result is our final product HORLICKS.

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RESEARCH METHODOLOGY

SCOPE OF STUDY The scope of the study is designed in terms of unit worked, the concept adopted and the

period under focus.

The unit

The study is done in the Finance department & stores department of GlaxoSmithKline

Consumer Healthcare Ltd. at Nabha plant.

The concepts

The concept of various tools and techniques of general inventory control are used and

analysed.

The period

The study is supposed to be relating to the period of last year’s consumption i.e. from

April 2013- March 2013.

Sources of Data:Secondary Data: - The study is based on mainly on the secondary data including Annual

Report, Store Records & for theoretical portion various books.

Primary Data: - The only mode of collecting primary data was the non-structured direct

intersection with the concerned persons of Finance & Stores Department.

LIMITATIONS TO THE STUDY

The main limitations to my study of working capital management in Glaxo Smith

Kline.

Healthcare limited are as follows:

1. Limited data:

They provide us limited data as they said that it is confidential to them. Like in the

estimation of reorder level and reorder quantity we used whole raw data they didn’t told

us how these levels are fixed, on what basis.

2. Less Feedback:

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Due to workload the concerned authorities are unable to feedback us properly on our

queries related to the topic.

3. Shortage of time:

There was very less time to get the whole analysis of how management of general store

inventory items is done and which techniques are applied on them in GSK

OBJECTIVES OF STUDY

The present study has been undertaken in respect of Glaxo SmithKline at Nabha the main

objectives of study are as follows: -

To know that how a company apply the controlling technique on the inventory.

To know that how the recategorisation of the inventory is done through the ABC

analysis.

To know that how a company actually get the benefit of the controlling technique.

To know that how other techniques can be better applied on the existing

controlling technique.

INVENTORY MANAGEMENT

Every business needs inventory for smooth working of its activities. It serves as a

link between production and distribution activities. Inventory the most significant part of

current assets.

Large size of inventory is maintained by firms, a considerable amount of fund is

required to be committed in them. Therefore, one of the most significant decision areas

concerning finance manager is inventory management. Inventories consisting raw

material, WIP, finished goods, maintenance spare parts a significant preparation of total

assets.

Inventory management means preparing the stock of goods at such I level that neither

the stock should be excessive or inadequate. It is a system, which ensures that right

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quality of material, is available in the right quantity at right time and right place with the

right amount of investment. Large size of inventory ensures efficient and smooth

production and sales operations, while minimum investment in inventories maximizes

profitability. Both the extreme points are dangerous. An efficient manager always

determines the optimum points in between of the two extremes. Excess installments in the

inventory pees danger like unnecessary the up of firm’s funds and loss of profit excess

carrying cost. Risk of liquidity and risk of physical deterioration of inventories. On the

other hand inadequate investment in inventories seeks to production hold ups failure to

meet delivery commitments. Thus, the aim of inventory management is to balance

between the two and maintain sufficient inventories. According to Curry and Frank:

“Because materials constitute such a significant part of product cost and since this cost is

controllable, proper planning, purchasing, handling and accounting are of great

importance”

DEFINITION OF INVENTORYThe dictionary meaning of Inventory is ‘a list of goods’. In a wider sense, inventory can

be defined as an idle resource, which has an economical value. It is however, commonly

used to indicate various items of stores kept in stock in order to meet future demands.

In any organization, there may be following four types of inventory:

a) Raw materials & parts- These may include all raw materials, components and

assemblies used in the manufacture of a product.

b) Consumables & Spares- These may include materials required for maintenance

and day-to-day operations.

c) Work-in-progress- These are items under various stages of production not yet

converted as finished goods.

d) Finished goods- These are the goods that are not yet sold or put into use.

OBJECTIVES OF INVENTORY MANAGEMENT:

The main objectives of inventory management are operational and financial. The

operational objective means that the materials and spares should be available in sufficient

quantity so that work is not disrupted for want of inventory. The financial objective

32

means that investments should not remain idle and minimum working capital should be

locked in it.

To minimize the idle time caused by shortage of inventory and non- availability of

inventories as per requirements, and

To keep down capital investment in inventories, inventory carrying cost and

obsolesces losses.

To avoid both over- stocking and under-stocking of inventory.

To minimize losses through deterioration, pilferage, wastage and damages.

INVENTORY CYCLE

In inventory cycle first of all raw material is purchased and then it is sent for

manufacturing where work in progress is then converted into finished stock which is

readily available for sale.

Same process is followed in GSK but at Nabha plant only manufacturing of

products is to be done whereas a sale finished product is done through the Head office. In

GSK at Nabha raw material are malted barley, Milk, Wheat Flour, Vitamins, etc. And in

GSK work in progress is not considered for accounting because it is nit calculated, it is

only that part of production which is in pipelines. And in last finished product is produced

which is filled in Drums and send to Head office (Gurgaon) for sale.

33

Raw MaterialsStock

Finished GoodsStock

Manufacturing

PURPOSE/BENEFITS OF HOLDING INVENTORY:

The transaction motive: Which facilitate continuous production and timely execution of

sales orders.

The precautionary motive: Which necessitates the holding of inventories for

meeting unpredictable changes in demand and supplies of materials.

The speculative motive: Which induces to keep inventories for taking advantages of

price fluctuation, saving in re-ordering costs and quantity discounts, etc.

INVENTORY CONTROL

34

Raw Material Arrivals (Restocking)

Sales of Finished Goods(Destocking)

Work in progress Stock

Revenue

Inventory Control is the art and science of maintaining the stock level of a given

group of items, incurring the least total cost, consistent with other relevant targets and

objectives set by the management.

Inventory control refers to “the process whereby the investment in material and parts

carried in stock is regulated within predetermined limits set in accordance with inventory

policy established by the management” (Gorden B. Carson). The activities of Inventory

control, thus, include the following:

Determination of limits of inventories to be held.

Setting out of investment pattern and its regulation as per individual and collective

requirements.

Follow-up to examine the working of the inventory policy and effecting changes

as and when needed.

IMPORTANCE OF INVENTORY CONTROL

The primary objective of inventory control is:

To minimize the idle time caused by shortage of inventory and non- availability of

inventories as per requirements, and

To keep down capital investment in inventories, inventory carrying cost and

obsolesces losses.

Achievement of these objectives will result in more return on capital which is

materially the prime objective of an organization whether commercial or industrial. The

formula given below is helpful in arriving at the return on investment:

RETURN ON CAPITAL = PROFIT

CAPITAL INVESTMENT

In normal circumstances, profit margin depends on external factors like

competition over which the management has little control. Here the question arises how

35

the management control over competitiveness? This is possible through the control over

inventories; the total capital in GSK is invested in fixed assets such as buildings, plant &

machinery and a cut in this cannot be effected. But a reduction in working capital, high

percentage of which is locked up in inventories, is possible and there is definite

increasing profit earning capacity of the organization.

Thus, efficient inventory management may result in more profit margins since it will

reduce the inventory cost resulted in reduction of production cost, more competitive

capacity, heavy turnover and increased profitability.

SCOPE

The scope of inventory management is vast. It encompasses various functions starting

with determination of the requirement of inventory and ending with the supply of finished

products to the users. In widest sense, functions included in the scope of inventory

management can be summarized as:

Determination of inventory requirement and planning its inflow.

Floating tender enquiries.

Identifying suppliers and placing orders for the suppliers.

Inspection of items received

Store keeping and stock control.

Issue, Valuation and Store Accounting.

Warehousing and Distribution.

All these functions are carried out, one after the other, in close sequence. First the

periodic requirement of inventory is determined on the basis of sales forecasts and

production plan. At the same time tender enquiries are floated for identifying the sources

of suppliers. Orders are then placed with the suppliers. When the inventory consignments

are received they are inspected to ascertain that items supplied are as per the

specifications given in the order. Items found in order are then stored in bins, racks and

containers to ensure their safety, security and prevent deterioration in quality. Inventory

items are issued from stores to production and other departments as per their demand.

Proper records are maintained for the receipt and issue of all these items.

36

INVENTORY MANAGEMENT- CONSTRAINTS &

PROBLEMS

CONSTRAINTSConstraints of inventory management vary from organization to organization

depending upon various variables; some of them are as under:-

a) Whether the demand for the goods is one time (static) or of repetitive nature

(dynamic). In GSK all the non-stock items are treated of static nature and

stock items of dynamic nature.

b) In case of demands of dynamic (repetitive) items, whether future

requirements can be assessed with certainty or uncertainty or under risk

(probability). Also, whether the demand is fixed over a time or is variable.

c) Whether the material is manufactured in house or is to be purchased through

outside suppliers.

d) Whether the lead-time during which material can be arranged is fixed or is

variable.

PROBLEMSThree basic problems associated with optimization of stocks are:

1. When to initiate purchase of the materials?

2. How much quantities are to be purchased at a time?

3. What should be the stock levels of the different items?

VARIOUS INVENTORY MANAGEMENT TECHNIQUES

a) Selective Management: - In this technique, various items of stores are classified

in various classifications depending upon their consumption value, unit price,

criticality for the organization, source of supply, purchasing problems, rate of

withdrawals from the stores, seasonality and stores balances on a particular date.

Different approaches of control are being followed for different types of items.

37

Two such classifications ABC & FSN are followed in GSK

b) Management by Exception: - In this technique, items with certain exceptions are

tackled on different points of time. For example, overstock items; surplus items

and inactive items may require more attention.

In GSK management by exception is followed for such goods that are stock outs

for some period.c) Rationalization: - Techniques of standardization and variety reduction are used to

minimize lead-time of the material, and reduce unnecessary inventory carrying

costs.

d) Value Analysis: - Functions performed by the materials are analyzed and

alternative designs/raw materials are suggested to achieve the same function at

minimum cost.

e) Computerization: - Computer outputs can be used for scientific forecast of

demand to solve many inventory models, providing optimum safety and for

controlling funds.

GENERAL STORE INVENTORYGeneral store is a major part of the inventory in all the concerns. It provides the

information regarding how much material we can purchase, and how much material we

can keep in store such as it is helpful to provide the information regarding all levels. The

major part of working capital of all the concern spent in General store inventory.

NATURE OF GENERAL INVENTORY IN GSKInventories are stock of the product a company is manufacturing for sale and components

that make up the product. The various forms in which inventories exist in a

manufacturing company are: raw materials, work in progress, finished goods & stores

and spares.

Raw materials are those basic inputs that are converted into finished product

through the manufacturing process. Raw material inventories are those units, which have

been purchased and stored for future productions.

38

In GSK Malted Barley, Wheat flour, Skim Milk Product (SMP), Fine Crystalline Sugar

(FCS), Roasted Malted Barley, Calcium, Potassium, Sodium, Vitamin Flavors etc., are

main raw materials.

Work-in-process. The work-in-process is that stage which is in between raw

material and finished goods. The raw material enters the process of manufacture but they

are yet to attain a final shape of finished goods. The quantum of work-in-process depends

upon the time taken in the manufacturing process. The greater the time taken in

manufacturing, the more will be the amount of work in process.

Consumables. These are the materials, which is needed for smooth process of

production. These materials do not directly enter in the production but they act as

catalysts, etc. consumables may be classified according to their consumption and

criticality. Generally, consumables stores do not create any supply problems and form a

small part of production cost. There can be instance where these materials may account

for much value than the raw materials The fuel oil may form a substantial part of cost.

In GSK Nabha Polythene, Drum Seal, Tape roll, Label, Cleansing Agent, Hand gloves,

Oil, Chemical, Coal, etc. are examples of some consumables.

Finished goods. These are the goods, which are ready for the customers. The s

tock of finished goods provides a buffer between production and market. The purpose of

maintaining inventory is to ensure proper supply of goods to customers. In some

concerns the production is undertaken on the order basis, in general without waiting for

specific orders.

In GSK main finished goods are Horlicks, Boost, Vanilla Horlicks, Elachi Horlicks,

Boost intermediate, Horlicks high fat, Junior Horlicks DHA, mother Horlicks DHA etc.

are products, which are produced for consumption in India. Mother Horlicks DMI and

Junior Horlicks DMI are products manufactured for export package and send to

Bangladesh.

Spares. Spares also form a part of inventory. The consumption pattern of raw

material, consumables, finished goods are different goods are different form that of

spares. The stocking policies of spares are different from industry to industry. Some

industry like transport will require more spares than other concern. Costly spare parts like

engines, maintenance spares etc. are not discarded after use, rather they are kept in ready

position for further use. All decision about spares is based on the financial cost of

inventory on such spares and the costs that may arise due to their non-availability

In GSK examples of Spares are Barring, V-Bolt etc.

39

GENERAL STORE INVENTORY IN GSKGeneral store is that which the part of the production becomes indirectly. Without such

inventory no production will be there. This store inventory includes: -

Polythene bags

Consumables like diesel etc.

Cleaning material like nitric acid, caustic soda etc.

Floor cleaning towels

Spare parts of the machines

Inventory required under GMP (Good Manufacturing Practices) like uniform,

hand gloves, mouth covers, safety shoes etc.

Under the general store inventory total no. of items are 2517, which have the

ABC classification. Their total consumption value is Rs. 51714106.83. It includes 45

items, some of which don’t have any classification because these items are used as and

when required during the year as such do not fall under any category and some are capital

related spares.

ABC ANALYSIS

ABC analysis is a basic analytical materials management tools. Fundamentally ABC

analysis may be applied to any branch of management eith ease and success. It calls upon

the top management to place its efforts where the result will be greatest. It is selective

approach popularly known Always (A) Better (B) Control (C). The ABC goes by its

name it always the best, then better and lastly the good.

Manufacturing organizations find it useful to divide materials into three categories

for the purpose of exercising selective control on materials. An analysis of the materials

cost will show that a smaller percentage of items of materials in the store may contribute

to large percentage of the value of consumption and, on the other hand, a large

percentage of items may represent a smaller percentage of the value of items consumed.

Between these two extremes will fall those items the percentage number of which is more

or less equal to their value of consumption. Items falling in the first category are treated

as “A” items, of the second category as “B” items and items of third category are taken as

“C” items. Such an analysis of material is known as “ABC ANALYSIS”

40

This technique of stock control is also known as stock control according to value

method or always better control method or proportional parts value analysis method.

Thus under this technique of stock control materials are listed in “A”, “B” and “C”

categories in descending order based on money value of consumption.

The significance of this analysis is that a very close control is exercised over the items

of “A” group which account for a high percentage of costs while less stringent control is

adequate for category “B” and very little control would suffice for “C” items.

All types of materials control i.e., purchase stores and issues are to be strictly applied

in case of the items of “A” group. In case of the “C” items an elaborate material control is

not exercised because these items represent a very small portion of the material costs.

These items can be purchased once a year and various stock levels i.e., minimum level,

ordering level etc. may not be adhered to. All the time, efforts and costs saved on the C

group items by not having an elaborate control can be usefully utilized on the A and B

group items.

A-B-C Analysis: This analysis is based upon PARETO PRINCIPLE, according to

which in many situations, majority of the activity (70 to 80%) is governed by very few

(10 to 20) attributes. Hence if all the stock items are analyzed in terms of their annual

consumption, major part of total consumption value on a GSK (about 70-80%) is of only

few high consumption value items (say 10-20%). These items may be classified as A

category.

15 to 20% of total consumption is represented by another 15 to 20% items that may be

classified as B category.

Remaining 5 to 10% consumption is represented by a large no. of small consumption

value items, which may be classified as C category.

Actually ABC classification depends upon management decision. In GSK it is decided

that-

All high consumption value items, which represent 70% of total issues, will be

classified as A category.

Items, which represent 20% of total issue, will be classified as B category.

All remaining items are of C category.

For the purpose of Inventory Control, A category items are most important. Therefore,

they are closely monitored at highest level at very frequent intervals.

41

Stock physical verification in GSK

For A category items is carried out every six months;

For B category items every year and

Once in two years for C category items.

To achieve better inventory turnover ratio, GSK intend to keep average stocks of 3

months, 6 months and 12 months of A, B and C category items respectively.

RECATEGORISATION

Recategorisation means to re-classify the items, inventory etc. that already have some

classification.

Such recategorisation is done as per the changed scenario.

Under the ABC analysis, recategorisation means to re-classify the particular

inventory, according to the new conditions. Recategorisation helps in knowing the actual

position of inventory. Without recategorisation process the benefit of the applied

technique is nil. But it should be done at the proper time neither too late nor too early,

because with the Recategorisation the applied technique remains effective.

NEED FOR RECATEGORISATION

The process of categorization of inventory in ‘A’,’B’,’C’ category was initiated in

1999. With the change in the inventory over the years and with the change in the unit

value and the consumption value of the inventory, the need arises for the recategorisation

of the inventory after some period of time according to the current norms.

Therefore the need of recategorisation the inventory arises essentially due to:

Introduction of new items during the period in stores inventory

Change in the prices of certain items

Revisiting norms set for the previous categorization

There can be the obsolesce of certain inventory items

There can be implementation of the” Written off” process

There can be change in the value of the existing items

42

METHODOLOGY

This inventory is based on the following criteria in GSK: Category A: - Unit value Rs.5000 & above or Annual Consumption Rs 50000

&above

Category B: - Unit value Rs.1000 & above but less than Rs. 5000 or Annual

Consumption Rs 10000 & above but less than Rs 50000

Category C: - Unit value less than 1000 or Annual Consumption less than Rs10000

RECATEGORISATION PROCESS For doing the recategorisation the whole of the inventory is analyzed on the basis

of the unit value & the consumption value.

REQUIREMENTS: General inventory items.

The Unit value

Their annual consumption.

For calculating the unit value any of the following is required

Closing value and closing quantity

Or

Opening value and opening quantity

Or

Consumption value and consumption quantity

Per Unit Value = Closing value/Opening value/Consumption value

----------------------------------------------------------

Closing qty./Opening qty./Consumption qty.

43

PREPARATION OF PROPOSALS

For preparing the proposals under the different conditions following steps have been

taken: -

Firstly check that according to the unit value in which category the item is

falling.

See that according to the consumption value which category is best suited to

the item.

Then out of the two put the items in the upper category.

For example: -

Item Code Per unit

value

Consumption

value

S13018 878.07 18731.44

Proposed

Category

C B

According to Unit value it should fall in ‘C’ category but according to Consumption value

it should fall in ‘B’ category.

Therefore, it will fall in ‘B’ category.

44

Item code Per unit value Consumption value

S60012 14.4 54735.20

Proposed Category C A

According to Unit value it should fall in ‘C’ category but according to Consumption value

it should fall in ‘A’ category.

Therefore, it will fall in ‘A’ category.

Existing status of inventory as on March 2013

Existing criteria: Per Unit Value Rs. 5000 & Consumption Value Rs.50000

1. According to No. of items

45

Category

Existing No. of

items %

A 288 11.44%

B 603 23.96%

C 1626 64.60%

TOTAL 2517

General Store Items Existing Cat.A,B,C(Numbers)

1626

603

288

11.44%23.96%

64.60%

0

200

400

600

800

1000

1200

1400

1600

1800

A B C

Existing category

No.

of It

ems

2.According to Consumption Value

General Store Items Cat.A,B,C(Values)

6.594.97

39.73

10.53%15.62%

73.85%

051015202530354045

A B CPERCENTAGE

46

Category

Consumption

Value %

A 39731691 76.83%

B 6587403 12.74%

C 4968394 9.61%

TOTAL 51714106

NOTE: Total items include

45 items, which have “No Category” but have consumption value of

Rs.426618.

PROPOSAL 1:CHANGES FROM THE EXISTING CATEGORY

Thus the exercise has lead to movement of 13% of total inventory to “A”

category as against 11% in the existing status with the little difference in the

percentage of items in the said category. Also there is movement of almost 26.5%

& 61% of total inventory to “B” & “C” categories as against 24% & 64.6%

respectively in the existing situation.

Category No. of items (E) % of existing items No. of items (P) % of items

A 288 11.44% 321 12.75%

B 603 23.96% 667 26.5%

C 1626 64.60% 1529 60.75%

TOTAL 2517 2517

47

CLASSIFICATION OF ITEMS INTO CATEGORIES

667

288

603

1626

321

1529

0200400600800

10001200140016001800

A B C

Category

NO

. OF

ITEM

S

ExistingCategory

ProposedCategory

On the same way, as per the proposal consumption value of near about 83% of total

inventory shift to “A” category as against 75% in the existing status with the little

difference in the percentage of items in the said category. Movement in the “B” & “C”

category is almost 12.6% & 4% as against 12.7% & 9.6% respectively in the existing

category.

Category

Existing

Consumption %

Proposed

Consumption %

A 39731691 76.83% 43039352.52 83.23%

B 6587403 12.74% 6512361.25 12.59%

C 4968394 9.61% 2162393.06 4.18%

TOTAL 51714106 51714106

48

Comparison of consumption value

39.73

6.594.976.51

2.16

43.04

05

101520253035404550

A B C

PERCENTAGE

CONS

UMPT

ION

VALU

E(M

ILLI

ONS

)Existingcategory

ProposedCategory

PROPOSAL (1): As per Unit Value Rs. 7000 & Consumption Value Rs. 70000

(ANNEXURE 2)

1. According to No. of items

Criteria 2- General Store items cat.A,B,C(Numbers)

1872

390242

74.89%

15.50%9.61%0

500

1000

1500

2000

A B C

Items (Cat.A,B,C)

No.

of i

tem

s

2. According to Consumption Value

49

Category

No. of

Items %

A 242 9.61%

B 390 15.50%

C 1872 74.89%

TOTAL 2517

Criteria 2-General Stores Proposed Items Cat.A,B,C

41.66

5.46 4.5910.25%12.82%

76.93%

0

10

20

30

40

50

A B C

CATEGORY (A,B,C)

CO

NSU

MPT

ION

VA

LUE(

MIL

LIO

NS)

NOTE: Total items in the Proposed Category include 13 items, which have “No

Category” as these are capital related spares and have no consumption value but there

are also 45 items which are used rarely in the production as such are not considered

under any category in spite of having consumption value.

COMPARISON

Thus the exercise has lead to movement of 9.61% of total inventory to “A” category as

against 11.44% in the existing status with the little difference in the percentage of items in

the said category. Also there is movement of almost 15.5% & 75% of total inventory to

“B” & “C” categories as against 24% & 65% respectively in the existing situation with a

large difference in the percentage of items in the said category.

50

Category

Consumption

Value %

A 41661289 80.54%

B 5461091 10.56%

C 4591726 8.90%

TOTAL 51714106

CATEGORY NO. OF ITEMS(E) % NO. OF ITEMS(P) %

A 288 11.44% 242 9.61%

B 603 23.96% 390 15.50%

C 1626 64.60% 1872 74.89%

TOTAL 2517 2517

Comparison (No.of items)

288

603

1626

242390

1872

0

500

1000

1500

2000

A B C

ITEMS(A,B,C)

NO.O

F IT

EMS

Existing Category

Proposed Category

On the same way, as per the proposal consumption value of near about 81% of total

inventory shift to “A” category as against 77% in the existing status with the little

difference in the percentage of items in the said category. Movement in the “B” & “C”

category is almost 10.5% & 9% as against 13% & 9% respectively in the existing

category.

51

CATEGORY CONSUMPTION VALUE(E) % CONSUMPTION VALUE(P) %

A 39731691 76.83% 41661289 80.54%

B 6587403 12.74% 5461091 10.56%

C 4968394 9.61% 4591726 8.90%

TOTAL 51714106 51714106

Comparison of Consumption Values

4.976.59

39.73

4.595.46

41.66

05

1015202530354045

A B C

CATEGORY (A,B,C)

CONS

UMPT

ION

VALU

E(M

ILLI

ONS

)

Existing Category

Proposed Category

CONCLUSION: The Existing criteria applied in stores is correct as it follows the ‘pareto

principle’ it shows that maximum consumption of minimum no. of items comes under ‘A’

category and minimum consumption value items with maximum no. of items falls under

‘C’ category. But some changes are required in the same as shown above i.e. some items

are required to move between all the three categories.

IMPLEMENTATION OF THE PROROSAL

For actual implementation of the selected proposal again some analysis is carried on.

Physical verification:

52

First of all physical verification of the whole inventory is done. Under this each and every

item of the inventory is verified with the books. For this purpose concerned person goes

to the stores and does the verification.

Current Year’s Consumption:After the physical verification all inventory is again checked with the current year’s

consumption. If in case of any particular item .the current year’s consumption changes

corresponding to the previous year’s consumption then it can be proposed in another

category, then that proposal is acceptable.

For instance:

Item Code: S13018

Consumption in fin. year ending March 2013 Current Category

5498.80 C

Consumption in fin. year ending March 2014 Proposed Category

18731.44 B

In this way all the items are analyzed and a final report is prepared.

ADVANTAGES OF ABC ANALYSIS

A strict control is exercised on the items, which represent a high percentage of the

material costs . Managerial time is spent on ‘A’ items whereas clerical staff with

least managerial supervision can handle ‘C’ items and sometimes ‘B’ items. Equal

attention to all the items of stores is not desirable because it will not be a cost

effective option for the firm. Concentrating on all the items of stores is likely to

have a defused effect on all the items, irrespective of the value of consumption.

Therefore, ABC analysis should be followed to give due attention to the items,

which they deserve, keeping in view their value of consumption.

53

Investment in inventory is reduced to the minimum possible level because a

reasonable quantity of ’A’ items representing a significant portion of the materials

costs is purchased.

To reduce investment in materials, close control of ‘A’ items contributes much

more than close control of ‘C’ items.

Storage cost is reduced, as a reasonable quantity of materials, which account for

high percentage of value of consumption, will be maintained in the stores.

With the introduction of the ABC analysis, management time is saved because

attention is required to be paid only to some of the items rather than on all items

It becomes possible to concentrate all effort in areas, which need genuine efforts.

It is most effective and economical method as it is based on selective approach.

It helps in placing the orders, deciding the quantity of purchase, safety stock, etc.,

thus saving the enterprise from unnecessary stock-cuts or surpluses and their

resultant consequences. This may be well shown by an example where average

inventory is one-half of the order quantity:

Category Annual consumption No. of Orders Average Working

Inventory

A Rs. 3,00,000 4 37500

B Rs. 30,000 4 3750

C Rs. 3,000 4 375

TOTAL Rs. 3,33,000 12 41625

Keeping the same no. of orders per year, viz., 12 inventories, can reduced by 39% merely

by segregating items according to their usage value as shown below:

Category Annual consumption No. of Orders Average Working

Inventory

A Rs. 3,00,000 8 18750

54

B Rs. 30,000 3 5000

C Rs. 3,000 1 1500

TOTAL Rs. 3,33,000 12 25250

FSN CLASSIFICATION

ABC Classification is on the basis of consumption value of an item and does not give any

importance to the criticality of the item and therefore, only ABC Classification is not

adequate. Classification done on the basis on the movement of the items in the storehouse

is known as FSN, where the items are classified as fast moving (F),slow moving(S) and

non-moving(N),items .This classification is done on the basis of consumption pattern of

the items under analysis. This analysis is useful in case of obsolete items. Previous year

issues is a guiding factor for FSN analysis previous two years issues are taken into

consideration for a decision whether the items stocked in storehouse are fast

moving ,slow moving or non moving.

Fast moving:-Items being issued more than 15 times a year may be placed in ‘F’

category. Certainly such analysis and limits of issue vary from one organization to

another organization.

Slow moving:-Items up to a certain limit say 10-15 issues in a year may be classified as

‘S’ items.

Non-moving:-If there is no issues of a particular item during the past few years,

naturally they will be classified as ‘Zero issue items’ and under this method of analysis

these items will be classified as ‘N’ items.

In GSK items, under FSN categorizing is done on the following criteria :-

55

Fast moving :-The items which are very frequently moved in one year are included in the

fast moving category .

Slow moving :-The items which are moved from stores for a period of one and a half

year.

Non-moving:-The items which are not issued from stores for more than three years.

In GSK Inventory’s FSN categorization of items in stores for the month of May 2013 in

which 91 lacs value items are of non moving nature which are not moved within a period

of three years and 43 lacs value are of slow moving which is moved within a period of

one and a half year and 64 lacs are of fast moving nature that are frequently moved.

Category Inventory (Lacs) Percentage (%)

Non Moving Inventory 91 51

Slow Moving Inventory 43 34

Fast Moving Inventory 64 15

Total 198 100

LEVEL SETTING

56

In order to have proper control over inventory various levels are set to avoid wastages and

for optimum utilization of stock. Following levels are set for the said purpose: -

o Re-order Level

o Minimum Level

o Maximum Level

o Danger Level

o Average Stock Level

(A) Re-order Level: - It is the point at which if the stock of a particular material in

store approaches, the storekeeper should initiate the purchases requisition for fresh

supplies of that material. This level is fixed somewhere between the maximum and

minimum levels in such a way that the difference of quantity of material between the re-

ordering level and the minimum level will be sufficient to meet the requirements of

production up to the time the time the fresh supply of materials received.

Re-ordering level can be calculated by applying the following formula:-

Ordering Level = Minimum Level + Consumption during the time required to get the

fresh delivery

Re-ordering level = Maximum Consumption *Maximum lead time

Here, maximum re-order period means the period taken to get the material once it is

initiated, so that the factory may not stop production in any case due to the shortage of

material.

(B) Minimum level: -This represents the minimum quantity of the material, which

must be maintained in hand at all the times. The quantity is fixed so that production may

not be held up due to shortage of material .in fixing this level, the following factors are

taken into consideration: -

Lead-time: - It is the time lag between the indenting and the receiving of material. It is

time required to replenish the supply.

Rate of Consumption of material during the lead-time.

Nature of Material:-Minimum level neither is nor required in case of a special material

which is required against customer specific order.

Minimum stock Level= Re-ordering Level - (Normal Consumption * Normal lead time)

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(C) Maximum Level: - It represents the maximum quantity of an item, which can be

held in stock any time. Stock should not exceed this level is fixed to avoid over stocking.

Maximum Level = Reordering level + Minimum Re-ordering Quantity - (Minimum

Consumption * Minimum Re-ordering Level period)

(D) Danger Level: -This means a level at which normal issue of the material are

stopped and issues are made only under specific instructions. The purchase offer will

make special arrangements to get the material, which reach at their danger levels so that

the production may not stop due to the shortage of materials.

Danger Level = (Average Consumption) * (Maximum re-order period for emergency

purchases)

(E) Average stock Level: -The average stock Level is calculated by the following

formula:-

Average stock Level = Minimum stock level + ½ of re-order quantity

OR

Average stock Level =1/2(Minimum stock level + Maximum stock level)

At GSK all these levels are set by stores department on the basis of the following

requirements:-

First of all consumption of the items by different department or according to

production pattern.

On the basis of lead-time involved on purchase of items.

ECONOMIC ORDER QUANTITY

Depending upon various variables, different inventory models have been

developed. Different models take different costs into accounts. One of the popular models

developed for items of repetitive nature (dynamic), future demands for which can be

projected with certainty is Economic Order Quantity (EOQ) model.

In addition to factors mentioned above, this model assumes that price of the

material remains constant with time and also does not vary with order quantity. This

model can be developed mathematically by differentiating total cost of inventory

(ordering cost + inventory carrying cost) with respect to Quantity.

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The quantity to be ordered should be such which minimize the carrying and

ordering cost. The order for the material to be purchased should be large enough to earn

more trade discount and to take advantage of bulk transport, but at the same time it should

not be too large to incur to heavy a payment on account of interest, storage and insurance

cost. If the price to be paid is stable, the quantity to be ordered each time can be

ascertained by the following formula:-

Economic Order Quantity (EOQ) = √ 2AO/C

Where,

A = Annual Consumption Quantity

O = Cost of placing one order (ordering cost)

C = Annual inventory carrying cost or holding

Every firm, needs due concentration on two basic questions or managing inventories

efficiently,

When to purchase?

How much to purchase?

The total cost of material usually consists of:-

Total acquisition cost (Purchase Value) + Total carrying cost (Holding Cost)

+ Total ordering costAcquisition Cost- Total acquisition cost i.e. total purchase value through is buying is

unaffected irrespective of the quantity of material ordered at one time unless quantity

discounts are available. Thus, when acquisition cost of a material remains the same, the

only costs to be taken care of are ordering costs and carrying cots.

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Holding cost – The very fact that the items are required to be kept in stock means

additional expenditure to the organization. The different elements of costs associated with

keeping stock over time are as follows:

Storage costs

Rent/depreciation

Labour

Overheads (e.g. heating, lighting, security)

Money tied up (loss of interest, opportunity cost)

Obsolescence costs (if left with stock at the end of product life)

Stock deterioration (lose money if product deteriorates whilst held)

Theft/insurance

Ordering costs-In large organizations like GSK, the demands received are technically

scrutinized, inquiries are issued, tenders are received and evaluated, orders are

progressed, materials are received and inspected and lastly, the payments are arranged.

All these constitute an additional costs to the organization and costs associated with

ordering and receiving an order are:

Clerical/labour costs of processing orders

Inspection and return of poor quality products

Transport costs

Holding costs

IN GSK ORDERING COST PER ORDER COMPUTED IS APPROXIMATELY Rs. 28

PER ORDER.

Economic order quantity is determined keeping in view the ordering cost and carrying

cost.

At GSK instead of using EOQ (Economic Order Quantity), ROQ (Re Order Quantity) is

used and this quantity level is calculated by inventory software and it is revised on the

basis of consumption requirements of different departments.

PROPOSAL

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Study and analysis of the inventory of gsk as per the eoq model to know the

difference between the total inventory cost to the organization in comparison to their

actual (roq method) and total savings, if any, can be made from the three different.

REQUIREMENTS:

General inventory items data.

The Unit value

Existing Purchase Orders (PO)

For calculating the unit value any of the following is required:

Closing value and closing quantity

Or

Opening value and opening quantity

Or

Consumption value and consumption quantity

Per Unit Value = Closing value/Opening value/Consumption value

----------------------------------------------------------

Closing qty./Opening qty./Consumption qty.

For calculating existing PO’s following method is adopted:

PO (Existing) = Purchase Qty./ ROQ

For Example: -

ROQ = 10

Opening Qty. = 30 units

Purchase Qty. = 100 units

Closing Qty. = 20 units

So Consumption Qty. = 30+100-20 = 110 units

In the absence of opening and closing qty., purchases & consumption will be the same.

But as there are both opening and closing balances the purchase orders are calculated on

purchase qty.

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PO’s = 100/10

= 10 units.

In this way the whole data is analyzed and current PO’s are taken out.

ECONOMIC ORDER QUANTITY

COMPUTATIONS DONE FOR:

Holding cost (hc)

Ordering cost (oc)

Po’s proposed

Total inventory cost (ic)

In gsk resonable assessment on general inventory showes holding cost to be 15% if the

average inventory & ordering cost is rs. 25 per order.

Existing cost (with ROQ)

TOTAL HOLDING COST (Existing) = Price per Unit/ Unit Value *15%

EOQ = ROUNDUP (SQRT((2*OC*CONSUMPTION QTY.)/HC), 0)

For calculating proposed PO’s following calculation is done:

PO (Existing) = Purchase Qty. / EOQ

Total holding cost & ordering costs are computed separately for “A”, “B”, “C” Category

items. Total inventory costs are also drawn out for the three categories and savings are

find out from their existing inventory costs.

TOTAL HOLDING COST (Existing)

= (ROQ * UNIT VALUE * 15% * LEAD TIME)/30

TOTAL ORDERING COST (Existing)

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= EXISTING PO’s * 28

TOTAL INVENTORY COST (Existing)

= PURCHASE VALUE (ACQUISITION COST)+TOTAL HC+TORAL OC

The above criteria is applied on the whole given data and randomly top 25-35 items are

chosen which gives some considerable amount of savings; to draw out conclusion and

the analysis & interpretation drawn from data shows:

“A” CATEGORY

NO.OF ITEMS TAKEN= 25

TOTAL EXISTING INVENTORY COST= Rs. 14248165

“B” CATEGORY



“C” CATEGORY



Proposed (with EOQ)

TOTAL HC (Proposed) = (EOQ * UNIT VALUE * 15% * LEAD TIME)/ 30

TOTAL OC (Proposed) = PROPOSED PO’s * 28

TOTAL INVENTORY COST (Proposed)

= PURCHASE VALUE (ACQUISITION COST)+TOTAL HC+TORAL OC

The above criteria is applied on the whole given data and randomly top 25-35 items are

chosen to draw out conclusion and the analysis & interpretation drawn from data shows:

“A” CATEGORY


TOTAL PROPOSED INVENTORY COST= Rs. 14253348

“B” CATEGORY


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TOTAL PROPOSED INVENTORY COST= Rs 449421

“C” CATEGORY


TOTAL PROPOSED INVENTORY COST= Rs.208213

FINDINGS OF THE PROPOSAL

Category Existing Inventory cost Proposed Inventory cost SAVINGS

A 14248165 14253348 5183

B 459965 449421 (10544)

C 196069 208213 12144

TOTAL 14904199 14910982 6783

Conclusion

The study shows that there are savings of Rs.6783 if EOQ model is used instead of ROQ.

In this study only 25-30 items are taken but the total no of items are in thousands in

GSKCH so if EOQ MODAL is used it will give more savings to the company.

JUST IN TIME INVETORY SYSTYEM

Just in time purchasing is the purchase of material or goods in such a way that

delivery of purchase item is assured before their use or demand. Just in time

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purchase recognizes too much carrying cost associated with holding high inventory

levels. Therefore, it advocates developing good relation with supplier and making

timely purchases from proven suppliers who can make ready delivery of goods

available as and when need arises EOQ (Economic order quantity) model assumes a

constant order quantity where as JIT purchasing policy advocates a different

quantity for each order if demand fluctuates. EOQ lays emphasis on ordering and

carrying cost but inventory management extends beyond carrying and ordering cost

to include purchase cost, quantity cost and stakeout cost .JIT purchasing takes into

consideration all these cost and move outside the assumptions of the EOQ model.

There are 150 JIT items in GSK, Nabha. ADVANTAGES

Investment in inventory is reduced because more frequent purchase order of

small quantities are made

Carrying cost is reduced as a result of investment in inventory.

A reduction in the number of suppliers. Only proven suppliers who can give

quick delivery of quality goods are given purchase order.

Quality costs such as inspection cost of incoming material or goods, scraps

and rework costs are reduced because JIT purchasing assures quick and

frequent deliveries of small size orders which h results in low level of

inventories causing minimum possible wastage .

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FINDINGS AND SUGESSTIONS

After conducting a deep study on the whole process of the ABC Recategorisation & EOQ

Technique, I found certain facts regarding the ABC analysis & EOQ, which are as

follows: -

FINDINGS:

Many items are there in the stores, which although lying in general stores but

don’t have any category in spite of having consumption value.

Some items have no consumption value but their minimum quantity is more than

twice.

Some modern techniques of inventory management like VED etc., which can help

in reducing investment in inventory, is absent.

Items, which are written off in the books, are lying in the stores and in any year if

again their need arises they are written back in the books.

Capital related spares are placed under D99 category. These are those spares the

asset value of which becomes zero but their spares have value.

Only few items are come under JIT.

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SUGESSTIONS:

All the general store inventory items should be recategorized especially those,

which have the consumption value during the year.

Company should have to go for some other controlling techniques like VED, JIT

etc.

The items, which don’t fall under any category, should be treated separately.

The company must treat ROQ & EOQ separately on their individual effects on the

inventory costs.

The ROQ model should be used as it will give more savings .

No. of items under JIT should be increased.

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CONCLUSION

From the thorough assessment of my study on “INVENTORY

MANAGEMENT” I Concluded that Controlling techniques relating to the general

inventory in GSK are developed with the objective of ensuring that the inventory will be

controlled in an effective manner, without having any loss to the inventory.

The study of Recategorisation of the general store inventory of GSK is conducting for

the purpose of knowing the actual status of the inventory in the stores. From this study I

conclude that any technique remains effective only when if it is carried on regularly

means at proper time. This study reveals that through the ABC analysis, effective control

can be exercised on the inventory. Items, which have more importance to the company,

those come under strict control. But all the items should have been categorized specially

those, which have consumption value during the year. No doubt their criteria of

recategorisation is appropriate but still some changes are required in it i.e. some

movements of general stores items are required between three categories. Regarding

EOQ technique, there is need of making effective changes in their present system.

At last I would like to say that there is proper control of inventory in the

organization. Inventory management is done at par. Proper accounts & records are

maintained of each and every item, better techniques are applied. 5S technique is

implemented fully in GSK.

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k.k final report

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